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Where does digital as a revenue metric stand for IT firms?

The term 'Digital' no longer serves its purpose, because it, as a share of revenue, lacks transparency and has made it tough to quantify revenue quality.

January 04, 2021 / 08:02 PM IST
Back in 2019, starting the December quarter, Indian IT services major TCS stopped reporting digital as a share of revenues.

Back in 2019, starting the December quarter, Indian IT services major TCS stopped reporting digital as a share of revenues.

 
 
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The US-based IT firm Accenture too stopped reporting its revenue from new, which encompasses digital capabilities and cloud, for its first quarter ending November 2020.

Julie Sweet, CEO, in an earnings call in September 2020, announced that with digital accounting for about 70 percent of the revenue, "we will no longer measure the new as the new is now our core".

Back in 2019, starting the December quarter, Indian IT services major Tata Consultancy Services (TCS) stopped reporting digital as a share of revenues stating that with digital becoming increasingly a part of the traditional services, it has become harder to differentiate between digital and otherwise. In the quarter ending September 2019, digital accounted for about 33.2 percent of its revenues.

On the other hand, Indian firms Infosys and Wipro continue to declare digital revenues.

For Infosys, Chief Executive Officer (CEO) Salil Parekh said it gives them a clear milestone as the company progresses in the digital journey.

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However, does it really serve as a benchmark as Parekh pointed out? Not really, say analysts. For, the term no longer serves its purpose, because digital, as a share of revenue, lacks transparency and has made it tough to quantify revenue quality.

Digital as a share of revenue

In a response to a query from Moneycontrol at a recent event, Parekh said: “What we are trying to demonstrate with this (digital revenues) is to let our stakeholders know that this is the area where we are transforming our company.”

To that extent, as Parekh pointed out, digital as a part of the revenue was one way for clients to measure what they are paying for and understand future technology readiness of the firm.

Digital broadly denotes revenue from new-age businesses such as cloud, products, and platform services that leverage these technologies. However, this definition differs from one company to another.

For TCS and Infosys, consulting, cloud, platforms, and new-age technologies are considered part of digital revenue, whereas Wipro does not count business from consulting as part of digital. Accenture’s revenue from new, the digital equivalent for IT firms, includes cloud, cybersecurity, and Internet of Things.

However, with digital becoming a significant share of the revenue, having a single metric hardly makes sense. “Digital as a metric was good until it lasted. But it is becoming meaningless,” pointed out Chirajeet Sengupta, partner, Everest Group.

Sengupta has a reason. For the quarter ending September, digital as a percentage of revenue accounted for about 47 percent and 41 percent for Infosys and Wipro, respectively. (Indian IT firms would start reporting Q3 FY21 results from January 8, 2021.)

Parekh has even said Infosys is looking at earning 50 percent of its revenue through digital in the coming months. He did not share a timeline for the same.

But for all of these firms, clearly, digital will be the key growth driver as their revenue from legacy is already seeing a decline. In that case, according to analysts, this metric hardly makes sense as just declaring digital makes it tough to understand firms’ quality of revenues.

Phil Fersht, CEO, HFS Research, an analyst firm, told Moneycontrol recently that “digital revenues are meaningless since each provider is simply lumping all sorts of stuff in there".

What is needed, they added, is a clear-cut metric that would make it easier to track the firm’s quality of revenues.

How will that help?

Digital projects include high-end consulting that commands a premium, and implementation of digital projects, which accounts for larger portion of the business and pricing is not that different from that of legacy, said a Mumbai-based analyst.

Sangeeta Gupta, Senior VP and Chief Strategy Officer, NASSCOM, said in its earlier interaction that in the case of implementation projects, there is not much of a difference in terms of margins between traditional and digital businesses. “As digital businesses scale, the margin difference will increase as well,” she added.

However, when companies declare everything under one umbrella, it gets harder to understand how much value do digital projects create in terms of revenues for customers. For the same reason, not declaring digital revenues at all as in the case with TCS will not help either, added Sengupta.

According to Fersht, in the current environment, revenues could be segmented by nature of projects such as cloud migration, consulting, transformation projects, and on-going support/managed services would make sense.

Sengupta explained that it could also be based on what each company has prioritised as its digital strategy. For instance, it could be cloud and consulting for one and customer design and analytics for another. It could also be disclosing large deals' values and nature of those deals, which not many companies do.

In the absence of no standard definition, companies could self-report on metrics that are key priority for them and how they are performing in those metrics, he added.
Swathi Moorthy
first published: Jan 4, 2021 08:02 pm

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